The recovery of the manufacturing sector in the United States remained intact in October, with expectations for the expansion to continue over the next six months.
The recent dip in the RSM index reflects an expansion moderated by supply chain disruptions.
Surveys of manufacturing activity conducted by regional Federal Reserve banks reported increases in new orders despite backlogs, longer delivery times, rising prices and inventories that were too low.
Delivery times and difficulty in acquiring goods used at earlier stages of production as well as intermediate goods will most likely continue to dampen overall manufacturing sentiment despite robust demand.
The RSM US Manufacturing Outlook Index is a composite of surveys conducted by those banks. And because of the importance of manufacturing to the economy, the health and prospects of the manufacturing sector are indicative of potential economic activity.
The RSM index rarely exceeds 2.0 standard deviations, with most of these brief elevated episodes immediately following a recession.
This month’s value of more than 1.2 standard deviations above normal suggests an expansionary production sector; only 18% of the months since 1968 have had higher results. The dip during the past three months reflects an expansion moderated by supply chain disruptions.
The regions
There are some differences developing among the regions. Activity in the Philadelphia, New York and Dallas areas slipped a bit from previous months but remained elevated. Manufacturing activity in the Richmond and Kansas City regions made robust increases. There are worsening supply-chain issues in all areas, tempered by employment gains.
Current manufacturing activity in the Philadelphia Fed region fell from September’s level, but new orders increased. Responses to the survey suggest continued expansion of manufacturing activity. There were increases in prices paid and received. And steady employment levels were reported by 65% of the firms, with increased employment reported by 31% of the firms.
Firms remain optimistic about growth. They are anticipating investments in software and noncomputer equipment and a small net decrease in capital expenditures on structure next year.
A slowdown in activity was also reported by manufacturers in New York State. Although new orders and shipments increased, it was by less than in September.
Delivery times reached a record high as did both prices paid and prices received. There was ongoing growth in employment and the average workweek, and firms were optimistic that conditions would improve over the next six months.
Factory growth in the Kansas City region moved higher from September’s already elevated levels. This month it was on the strength of non-durables manufacturing, in particular paper and printing production, chemical manufacturing and plastics products. The report noted that durables manufacturing grew more modestly.
Supply chain disruptions and shortages were reported by 95% of the firms,
and around 70% of firms reported diversifying suppliers. A higher share of firms also reported increasing inventories and turning away business. A third of firms reported making capital or technological investments in response to supply chain issues.
Expectations were that upward pressure on prices would continue over the next six months.
Demand indicators in the Dallas region increased in October, while current activity—though still elevated—was the lowest in five months. Supply-chain disruptions continued, and the unfilled orders index and delivery time indexes pushed higher.
Employment indices increased as 32% of firms noted net hiring, while only 4% noted net layoffs. Wage and price indices remained elevated.
All three component indexes—shipments, new orders and employment—were positive during October in the Richmond Fed area, a welcome turn after last month’s negative reading of the composite index.
Supply chain issues remain, however, with backlogs of orders still prevalent and firms reporting that inventories of both finished goods and raw materials remain too low.
The takeaway
Given the continued growth that is expected in the manufacturing sector, businesses must continue to evaluate themselves and how they are positioned for growth.
There will be a heightened focus on supply chain resilience and visibility, as well as continued automation across the entire value chain. Ultimately, organizations that invest in technology to create a more connected ecosystem, maximizing the use of data and analytics, will be best positioned to weather market shocks.
